CGE25111

Globalization and Business

Lecture 10
Managing International
Operations
 Chapter Preview

• Identify the types of planning involved in production

strategy.
• List the reasons for making or buying inputs.
• Explain issues that are of special concern in
production strategy.
• Discuss the relationship between quality and
profitability.
 Production Strategy

Essential to achieving objectives

Reflects overall firm strategy

Low-Cost leadership

Differentiation

Focus
 Capacity Planning
Assessing a company’s ability to
produce enough output to satisfy
market demand.

1. Number of work shifts

2. Number of employees
3. Labor regulations
4. Facility capacity
5. Sub-contracting
 Facilities Location Planning

Selecting a location for production facilities

Resources,
political, economic Labor costs and
and cultural productivity
conditions

Service Factory to
customer needs market distance
 Facilities Location Planning

Here are a few issues to consider.

•Managers must explore the cost and availability of labor and
management, raw materials, component parts, and energy,
political stability, regulations, and economic growth.
•If a location is chosen for its low labor costs, workers must be
sufficiently productive.
•Service companies must consider customers’ needs when
locating facilities that are close to customers.
•The greater the distance between production facilities and
target markets, the higher are the shipping costs and the more
a firm is exposed to supply chain disruptions.
 Location Economies

Economic benefits
derived from locating
production activities in
optimal locations.
 Location Economies
•
Location economies arise from the right mix of
elements in the business environment.
•
A firm can either locate activities there itself or
obtain products and services from companies
at the location.
•
The key fact is that each production activity
generates more value in a particular location
than could be generated elsewhere.
 Location Economies

Boeing
• Aircraft designed in Washington
and Japan, but assembled in
Seattle with tail cones made in
Canada and special tail sections
made in China and Italy, and
engines made in Britain.
• Advertising campaign conceived
in Britain, filmed in Canada and
edited in New York.
Centralized vs. Decentralized

Centralized production
 Low-cost leadership
 Global strategy
 Transportation costs

Decentralized production
 Differentiation / Focus
 Multinational strategy
 Buyer preferences
 Centralized vs. Decentralized

Centralized production refers to the

concentration of production facilities in one
location.

Decentralized production, on the other hand,

spreads facilities over several locations and
can even mean a separate facility for every
business environment.
 Centralized vs. Decentralized

•Centralized production with its accompanying

economies of scale is well-suited to the low-cost
leadership strategy.
•A company focusing on low costs does not differentiate its
product and need not locate near markets.
•Yet, the company must consider the cost of transporting
inputs into production and getting outputs to the market if
they are very distant.
•Decentralized production is well-suited to firms following
differentiation and focus strategies.
•Locating facilities near markets helps them remain close to
customers and respond to changing buyer preferences.
 Process Planning

Deciding the process that a company

will use to create its product.
Low-cost leadership
 Large scale
 Efficiency

Differentiation / Focus
 Skills
 Flexibility
 Process Planning

•Low-cost strategies require large-scale production to

achieve economies of scale.
•The availability and cost of labor may be crucial to process
planning.
•A low-cost leader may opt for more labor-intensive
production methods if local labor is inexpensive.
•Companies following differentiation strategies typically
offer superior quality, added features, and so forth.
•These firms may employ skilled craftspeople to make
highly specialized goods, or use flexible technologies that
allow for rapid product changes as market conditions
warrant.
 Standardized or Adapted
Production Processes
Low-cost leadership

Standardized
Differentiation / Focus
Automated

Large batches Adapted

Small scale

Higher cost
 Standardized or Adapted
Production Processes
•
Low-cost leadership strategies typically
dictate automated, standardized production
in large batches.
•
Large batches reduce per-unit production
costs, which offsets the higher initial
investment in automation.
•
Costs are further reduced as employees
repeat processes and become more
proficient.
 Standardized or Adapted
Production Processes
Differentiation may demand decentralized
facilities to improve local responsiveness.
These facilities tend to be small scale because
they produce for a national or regional market.
The lack of economies of scale increases per-
unit production costs.
Manufacturing and R&D costs may also be
higher for products with special product
designs, styles, and features.
Facilities Layout Planning

Deciding the spatial

arrangement of production
processes within facilities.

• Reflects business-level strategy

(e.g. mass production or work cells)

• Location’s geography is also a facto

(e.g. Singapore vs. Canada)
Make-or-Buy Decision

Raw materials

Intermediate components

Availability

Needed modifications

Cost considerations
 Decision to Make

Vertical integration
Extend control over inputs (backward integration)
or output (forward integration)

Reasons to make

Lower Cost

Greater Control
 Decision to Buy

Outsourcing
Outsourcing Reasons
Reasons to
to buy
buy

Lower
Lowerrisk
risk
Buying
Buyingfrom
fromanother
another
company
companyaagoodgoodor or Greater
Greaterflexibility
flexibility
service
servicethat
that is
isnot
not
central
centralto
toaacompany’s
company’s Market
Marketpower
power
competitive
competitive advantage.
advantage.
Barriers
Barriersto
tobuying
buying
 Materials and Assets

Raw materials
 Quality
 Quantity

Fixed assets
 Existing Facility
 Greenfield
 Materials and Assets

•Quality and quantity drive many decisions

about raw material acquisition.
•Some industries and companies must rely
almost exclusively on locally available raw
materials, such as beverage companies.
•In such cases, raw material quality has an
enormous influence on final product quality.
 Materials and Assets
•Fixed assets include production facilities,
inventory warehouses, retail outlets, and
production and office equipment.
•Companies can acquire existing factories or
build new facilities from the ground up, called
a greenfield investment.
Managing a Global Supply Chain
Logistics encompasses the activities
necessary to get materials to a
manufacturing facility, through the
manufacturing process, and out through a
distribution system to the end user.
In international business, this is
complicated by distance, time, exchange
rates, and customs barriers etc.
Efficient logistics have a major impact
upon a firm's bottom line.
 Quality Improvement

Total Quality
ISO 9000
Management (TQM)

Continuous quality improvement

to meet or exceed customer International Standards
expectations through Organization 9000 is a
quality-enhancing processes. certification a firm gets when
It places responsibility on it meets the highest quality
each individual to focus on standards in its industry.
the quality of output.
 Kaizen

The Japanese process of continuous improvement,

which requires identifying problems and enlisting
employees at all levels of the organization
to help eliminate them.
The Relationship Between Quality and
Costs
 Other Production Issues

Just-In-Time
Shipping Inventory
(JIT)
Costs Costs
Manufacturing
 JIT Manufacturing

A system that reduces inventory costs by

having inputs delivered just as they are needed
for the production process.
Borrowing Funds

Difficulties:

 Exchange-rate risk

 Currency inconvertibility

 Restricted capital flows

 Emerging Stock Markets

Hot money:
Liquid investments that
can be quickly withdrawn
Extreme
volatility Patient money:
Holdings of factories,
equipment, and land that
Poor cannot be quickly withdrawn
regulation
 Internal Funding

Equity,
Equity, debt,
debt, Revenue
Revenue from
from
and
and fees
fees operations
operations

Subsidiaries
Subsidiaries financed
financed by byMoney
Money earned
earned from
from
parents,
parents, who
who areare later
later sales
sales is
is the
the lifeblood
lifeblood
rewarded
rewarded financially
financially of of every
every company
company
End of Lecture 10